FHA Loans vs. Conventional Loans: What’s the Difference?
FHA loans qualify for a low credit score, and it can be easier to be eligible for a conventional loan. However, a traditional loan may not need mortgage insurance with a large down payment.
You should pay up to 5 to 20% mortgage insurance down payment with the conventional. With the FHA loans, only pay a 3.5% down payment. Our professional lenders in Texas guide you on the credit score requirements for conventional and FHA loans.
FHA loan
FHA loan is a government-backed home loan that the Federal Housing Administration insures. An FHA loan has less restrictive qualifications, so it is a good choice if you are worried about a down payment and a lower credit score.
The conventional loan
A government agency does not guarantee the conventional loan; private lenders insure them. As a result, you have a higher credit score, lower debt-to-income ratio, and down payment to qualify.
A conventional home loan is also called a conforming loan. Moreover, government-created enterprises buy from lenders and hold them or turn them into mortgage-backed securities.
The credit score of your conventional or FHA loans
Whether you follow an FHA or a conventional loan, lenders look at your credit score. Your credit score is a three-digit number; it represents the amount of risk a lender takes on when you borrow some money.
Your credit score could range from excellent to poor, and it is all based on your credit history.
A mortgage company looks at your credit scoring model, ranging from 350 to 850 points. Lenders also use scores and another type of credit scoring model. In addition, three major credit bureaus report your credit score and information: Experian, Equifax, and TransUnion.
Conventional loan credit score
Credit score needs for a conventional loan differ depending on the lender. However, it would help if you usually had the lowest credit score of 620 or higher to qualify for a conventional loan in Texas.
The credit score needs to be higher for conventional loans compared to FHA. Because the lender takes more risk, and conventional loans do not support a government agency.
FHA loan credit score
You may qualify for an FHA home loan with a credit score as low as 500, but it comes with attached lines. For instance, you need to pay a 3.5% down payment to get an FHA loan with a 500 credit score.
Your credit score is higher; the lower down payment needs to be for an FHA loan. Generally, most FHA loan lenders require borrowers to have around 580 and above credit scores.
The down payment of FHA and conventional loans
Let’s check precisely how much down payment you will need to pay for each type of loan.
Conventional loan down payment
Defiant to popular opinion, a 20 percent down payment is not needed to obtain a conventional loan. However, if you cannot come up with a 20% down payment, you will have to pay private mortgage insurance. Which is a lender’s protection in case you default on your loan.
A smaller down payment equals more risk, so you mitigate the risk for the lender when you are paying for mortgage insurance.
FHA loan for your down payment
You can pay a down payment as low as 3.5 percent for an FHA loan in Texas, but you will also need to have a credit score of at least 580. If your credit score is lower, in the 500–579 range, you will need to be paid around 3.5 percent down.
Here is an example of how much you’d pay for a down payment on both types of loans:
- Conventional loan down payment of 20% on the house.
- FHA loan down payment of 3.5% on the house.
Choose the right option
The mortgage company needs to pay 3.5% for an FHA loan or 5 to 20% for a conventional loan. The mortgage insurance is typically paid for the life of your loan. Unless you make some down payment minimum as much as. So, according to your pay the upfront mortgage premium, which amount is average for your base loan money.
